The revelations focus mainly on how then-President Lee Teng-hui and a handful of trusted aides handed out money to finance diplomatic initiatives large and small--from trying to influence major decisions in Washington, to apparent espionage efforts in China, to funding research at Harvard University by a Taiwan-friendly former senior Japanese defense official.

Airing of such details is potentially devastating for Taiwan's discreet, money-driven style of diplomacy. But the existence of a largely unsupervised fund of about $100 million at the island's main intelligence arm, the National Security Bureau, also has exposed a gaping hole in accountability for public funds.

A clumsy police raid to try to halt the hard-edged weekly Next from publishing the revelations early last week added to the scandal's impact, threatening further damage to Taiwan's image abroad and unleashing an intense debate at home about the limits of press freedom.

Exactly who leaked the incriminating documents and why remain a mystery. Some theorize that disgruntled intelligence officials were trying to embarrass their masters in revenge for efforts by President Chen Shui-bian's government to bring them to heel. Others believe that the move is part of a high-stakes fight between political factions jostling for advantage in the run-up to the next presidential election, in 2004.

Jimmy Lo, a member of a Taiwanese parliamentary faction loyal to Lee, blames Beijing.

"China is behind this," he said in an interview. "They want all these secret ties to be exposed."

So far, however, there are few definitive clues.

"I not only don't have a theory myself but don't even know if the intelligence community knows what's going on," said Bi-khim Hsiao, a respected member of parliament from Chen's ruling Democratic Progressive Party.

Efforts to Contain Leaks Prove Futile

Despite the government's attempt to suppress the leaks, information continues to dribble out, much of it now carried in media outside Taiwan. Thursday's editions of the Hong Kong daily Sing Tao, for example, carried details of a document detailing a September 1998 meeting in Taipei between Lee and Gerald Cassidy, head of the Washington-based political consultancy Cassidy & Associates.

Taiwan is believed to have paid several million dollars to the firm to represent its interests in Washington. According to Next magazine, the money used was interest on the slush fund account.

The scandal has compromised Taiwan's ability to continue lobbying quietly and effectively in key foreign capitals. Pursuing such a diplomatic strategy is crucial to the island, which is formally isolated from most of the world community because of pressure from Beijing. Communist China insists that Taiwan is an errant province that belongs under mainland control.

The publicity associated with the slush fund revelations is unwelcome to those who have dealings with Taipei, because they prefer their ties to be confidential to avoid risking Beijing's wrath.

"The greatest damage is the breach of mutual trust," Hsiao said. "Many of those involved in some way with the Taiwan government in a completely legal yet confidential way will now be unsure. This will have a major effect."

Noted a diplomat based in Taipei, the Taiwanese capital, who spoke on condition of anonymity: "Whoever's behind this has really hurt Taiwan. Whether they get caught and charged is almost irrelevant at this point. The bottom-line loser here is Taiwan's unofficial diplomacy."

The police raid on Next's editorial and printing facilities could also backfire diplomatically, mainly because so much of the international goodwill enjoyed by Taiwan stems from its successful transition during the last 15 years from authoritarianism to democracy.

Chen's conciliatory response to a letter from the New York-based Committee to Protect Journalists protesting the magazine raid has been viewed as an attempt to ease worries about a possible press crackdown. Next executive Mark Simon condemned the raid as "a thinly veiled attempt to suppress the stench of scandal in the name of national security."

National Security Bureau officials told some members of parliament earlier in the week that computer disks containing copies of the documents detailing the slush fund activities were mailed to Next magazine; a security bureau employee; and two members of parliament from the People First Party, who had earlier accused the intelligence bureau of keeping secret funds.

The large-circulation daily China Times also obtained a copy of the documents and printed a story about their content last week. The paper was not raided by police, but its editor in chief, Huang Ching-lung is under investigation on charges of breaching national security.